Choosing a new set of wheels is rarely an easy process, but that decision-making becomes all the more complicated if you’re a company car driver, because it also impacts your tax bill.
If your employer provides you with a car for business use but you’re able to drive it outside work hours (and yes, that includes commuting), HMRC classes this as a benefit-in-kind (BIK).
This is a catch-all term for any workplace perk provided in addition to your salary, and these are also taxable.
Company car tax bands are usually adjusted every year and, since 2002, the system has been designed to influence drivers to choose the most fuel-efficient vehicles. Those incentives helped fuel the ‘dash for diesel’ during the 2000s and, with 720,000 company car drivers in 2021/22, they’re now driving the market for plug-in hybrids (PHEVs) and electric vehicles (EVs).
Despite the jargon, calculating your company car tax bill – and keeping it low – is a lot easier than it looks. Here’s what you need to know.
How does the company car tax system work?
For most drivers, it’s a seamless process. Company car tax is usually deducted from your monthly wages as a BIK payment, so you’re unlikely to face a hefty bill at the end of the year. However, the size of that monthly payment varies enormously.
Every company car has what’s called a taxable value, which is unique to that car. It’s calculated as a percentage of the list price (or P11D value), weighted according to its tailpipe CO2 emissions and, for PHEVs, electric-only driving range.
The list price includes optional extras, VAT and delivery charges but not the registration fee or the first year of vehicle excise duty (VED, or road tax). It’s also fixed for life, so it doesn’t reflect discounts for new cars or the lower price of a used one.
BIK is paid as a percentage of that taxable value in line with your income tax band (20%, 40% or 45%, unless you’re in Scotland, which has different rates), and that annual figure is then split equally across your pay packets.
For example, a 20% income taxpayer would be liable for 20% of the vehicle’s taxable value per year.
The cheaper the car and the lower its CO2 emissions, the lower the tax bill.
Which tax band does my company car fit into?
The starting point is finding out how much CO2 your car emits – and, if it's a PHEV, its electric-only range. Your fleet manager or vehicle supplier should have that data.
Manufacturers switched to a more granular and tougher economy test cycle in 2017, and both figures are affected by options such as larger wheels, sporty bodykits and even heavy panoramic sunroofs. This can cause some models to straddle multiple tax bands, so it’s important to check.